We all know restaurant delivery has become the opportunity dejour, hopeful talk on delivery has recently caused security analysts to lift their entire restaurant industry perspective (see Morgan Stanley, John Glass, July 2017). Stronger and weaker brands everywhere are talking about it; the real and perceived consumer sentiments, eating at home, the Blue Apron IPO and the Amazon purchase of Whole Foods provided unmistakable interest. However, one brand (doing real well) isn’t doing delivery, no way: this week founder/CEO Ken Taylor of Texas Road House (TXRH) said he was happy to have his competitors deliver luke warm food in an attempt to make up for years of their declining traffic[1]

Some restaurants have been doing delivery forever and their business model s is based upon it (the pizza majors (Pizza Hut, Dominos (DPZ), Papa John’s (PZZA)), Jimmy John’s and still others. But when you have McDonald’s working a massive delivery rollout, you know it is serious.

Many numbers and operations folks in this penny business are thinking about the delivery incremental sales and margins. At least four issues of concern are: (1) how does the restaurant handle the hoped for orders influx (2) any incremental staffing or CAPEX required (3) how much commission does the restaurant have to pay to the deliverer/app systems provider and (4) how do we retain quality control? Putting aside the quality issue for a moment, the economics can be speculated. The “standard” UberEats/ DoorDash commission is heard to be around 30% but no doubt some brands can get lower than that. I know it’s a big deal because several chains are noting that the commission is now “below” the restaurant P&L contribution line. We can all guess why: unit managers might not want the expense.

Clearly, the upside is: (1) more traffic (2) higher average ticket (3) later ticket ordering to leverage later day staffing. Let us see how the penny profit per transaction could work out for a typical QSR franchisee and a company owned casual dining operator:

Clearly, here we can see both margin dollars and percentage contribution margin erodes with delivery. If there is no cannibalization great; but if there is, additional traffic must be generated to “payback” the margin loss. If there is some way to get the ticket higher, and/or get the commission lower, good things will happen.

The casual dining penny profit per transaction rises but the percentage margin falls. Well, we all know we take dollars to the bank, not percentages. The check size is critical to this example.

We don’t know yet what will happen. Consumer interest and activity will vary on many factors. Additionally, many cost accounting issues can be debated—such as will a full advertising charge still be proper on the delivery sales, how much is the delivery check as a multiple of the existing check, and whether there would be any cannibalization or not.

My opinion is somehow restaurants are going to have to ditch the outsourced delivery and apps platform providers. That will be a bitter pill for some--the asset light/sharebuyback investor lobby will be unhappy-- but the current delivery economics is too tough. In this day and era of over penetrated restaurants, perhaps coalitions of similar brands can build their own infrastructure more cheaply and provide meaningful quality assurance.